Capital gains tax scrapped, avoid Uchumi

On Thursday, investors got a reprieve when the government scrapped the controversial capital gains tax. This was declared during the reading of Sh2.1 trillion budget for the year starting July 1.

The capital gains tax (CGT) was pegged at 5 per cent on the gains made from selling shares at the Nairobi bourse. According to National Treasury Cabinet Secretary Henry Rotich, the measure was due to challenges faced in its implementation. In its place, NSE investors will have to contend with a 0.3 per cent withholding tax on the transaction value of the shares.

According to Eric Munywoki, a research analyst at Old Mutual Securities, in terms of budgeting and filing, the new transaction levy will be easy to account for unlike the CGT.

“The Treasury will determine the amount of funds accurately expected from the market by, for instance, calculating from the turnover,” he says. “But one of the key gains will be attracting back the foreign investors we’ve been losing in droves. People generally react positively to levies than taxes.”     

UCHUMI

Last week, Uchumi Supermarkets said that it’s seeking Sh500 million loan to pay its suppliers. This came hot on the heels of allegations from Kenya Power that Uchumi was refusing to remit power bill token monies collected at its tills and instead was doing business with it.

Last year, the retailer had taken a loan of Sh405 million from Cooperative Bank to pay suppliers and a Sh600 million loan from KCB for expansion. The retailer has generally lost its cake to high flying retailers Nakumatt, Naivas and Tuskys, even as international retailers such as Wallmart and Choppies enter Kenya.

“The main challenge for Uchumi is working capital management vis-a-vis a viable growth strategy,” says Mr Munywoki. Further, according to Ndindi Nyoro, the head of Investax Capital Limited, Uchumi may need to overhaul its top brass for the retailer to see light of the day again.

“The conditions for Uchumi to thrive are ripe but it’s falling. It would seem that its top managers have run out of steam. Until there’s a change in management and strategy, it would be well to avoid the stock or trend very carefully.

It can consume your investment without notice.” On Friday, Uchumi opened at Sh10.40, a dip of 1.89 per cent from Thursday’s closing price of Sh10.60 per share.

KENGEN

This is a stock that could swing both ways. On one hand, short- and medium-term investors may consider avoiding it. On the other, long-term investors and rights issue speculators could take position.

According to Kevin Tuitoek, a research analyst at Genghis Capital, prospects for continued growth of the firm are high, riding on the 348 per cent rise in profit after tax recorded by the power generator.

He singles out the company’s on-going projects: “A 15MW geothermal capacity that is to be injected through new plants set to be commissioned this month. This is in sync with the government’s efforts to ensuring 5,000 MW are hooked into the national grid,” he says.

“Further, development of Horizon II is set to add 350MW from geothermal power and 100MW in wind power from Meru County.” On rights issue, Mr Tuitoek says positive sentiments on the current financial position of the company is going to work in the favour of KenGen floating the cash call.

But according to Mr Munywoki, KenGen’s capital expenditure is very high. “Although the stock is currently trading at a bargain, it does not peer with Kenya Power.

This is because of the inevitability of the company borrowing more while expecting to offer rights issue,” he says. “If one is to buy for the long run, then it should be for a very long-term. Buying for a rights issue would seem to be more applicable. If not, I would recommend Avoid!”

On Friday, the counter opened the day at Sh9.10 per share from the Sh9 per share recorded on Thursday. Over the past one year, KenGen has touched a low of Sh8.70 per share and climbed to a high of Sh13.15 per share.

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